City warns BA bid for BMI is 'pie in the sky'

It follows a European Union warning that its proposed alliance with American Airlines and Spanish airline Iberia may breach competition rules.

BA chief executive Willie Walsh is now struggling to get support from the City for his hopes of a merger with BMI.

Howard Wheeldon, senior strategist at BGC Partners, said while a deal sounds like a "lovely idea" for BA it "just won't happen". He said a tie-up would falter on regulatory issues and BA's financial problems.

Doubts over the possibility of a deal have emerged in advance of Walsh addressing an Edinburgh Chamber of Commerce dinner tomorrow evening, when he is expected to be questioned on the possible impact of any merger on flights provided by the two airlines.

BA and BMI run 25 flights daily from London Heathrow to Edinburgh. Another ten are operated by BA from Gatwick and London City to Edinburgh. BA and BMI together have 22 flights from Heathrow to Glasgow, with BA running another eight from London City and Gatwick. There are 18 flights between BA and BMI daily from Heathrow to Aberdeen.

Speaking last week, aboard the inaugural BA flight from London City to New York's JFK airport, Walsh said he was interested in making a "very credible offer" for loss-making BMI if German-carrier Lufthansa, its majority owner, decided to sell.

BMI has 11 per cent of the take-off and landing slots at Heathrow, second only to BA, which has more than 40 per cent, and this could spark competition concerns. Wheeldon said: "From a regulatory point of view, it's just not feasible."

He added: "BA isn't exactly an airline flush with cash. But it won't walk away from BMI if there is even a remote possibility that Lufthansa was prepared to sell."

He said Lufthansa may want to "sit on it", rather than decide to sell up any time soon. It is thought that Lufthansa would rather restructure the business than offload BMI in the near future.

However, Gert Zonneveld, an analyst with Panmure Gordon, said there is still potential for a deal. "BA would love it to happen," he said. According to Zonneveld, competition issues could be averted if BA sold off some of the air slots or pulled out of some short-haul routes. By buying BMI, he said BA could pull out of Gatwick and focus its resources on Heathrow which would create "huge cost savings".

Walsh has been vocal in his calls for a third runway at Heathrow, which is opposed by the Conservative party. Last week he warned that short-haul flights could suffer if it does not go ahead. He said: "We can get additional long-haul growth at Heathrow by reducing the scale of our short-haul operation, which is sub-optimal."

CBI Scotland's David Lonsdale said: "What is important to Scots firms is that they continue to enjoy good access to London's key interlining airports, Heathrow and Gatwick. This is vital for accessing global markets and customers, but also so Scotland can continue to attract foreign investment and talent. It explains our staunch support of additional runway capacity at Heathrow."

Walsh will be quizzed tomorrow on whether Scottish routes to London could be the ones to be reduced. But Wheeldon said Scotland has several "interesting" airlines which would snap up the routes if that happened.

Walsh may also be asked about the European Commission's probe into a pact to co-ordinate schedules and prices. American Airlines and fellow Oneworld alliance partners, BA and Iberia, face new EU antitrust hurdles as they look to extend their pact.

The airlines had planned to take advantage of the US/EU Open Skies agreement, with the focus on routes between the US, Mexico, Canada, the EU, Norway and Switzerland, but EU regulators said the latest plan may violate competition rules on restrictive business practices.

The EC is thought to be concerned that the alliance could monopolise certain routes and lead to fewer flights for some destinations.

BA reported a pre-tax loss of 148 million for the three months to 30 June, its first drop into the red during the first-quarter as a private company.

As well as thousands of job cuts, pay has been slashed. In June, Walsh asked the 40,000-strong workforce to work unpaid or go on unpaid leave.